Make your money work for you!

Month: August 2015

A while back I wrote that I took a look into Estateguru as an investment opportunity due to wanting to both diversify and perhaps move a part of my lending portfolio into real estate backed loans. Since then they’ve slowly gotten their pipeline going and there is new projects happening every now and then.

What do I like about Estateguru so far?

While the interface and web page could be smoother, all numbers and transactions are clearly visible and I’ve had no issues so far trying to find information and failing to. (Looking at you here, Bondora!)

There’s a reasonable amount of data on each investment and there’s enough projects moving currently to have hope of not much cash drag happening.

The loan terms are short, meaning that the lack of a secondary market at the moment isn’t as big of an issue as it would be if the investments were 3+ years.

I don’t need to log on often to keep track of what’s happening – in that sense it’s way more passive than some other investments I have. (I trust they won’t make any big changes without previous info.)

Portfolio plans?

I’m currently a bit torn when it comes to my plans for Estateguru. Due to the short term of the projects, it doesn’t take long to create a kind of a cycle of investments. (It’s shorter than with Crowdestate for example). This means that in theory out of all my investments Estateguru is closest to a classical CD ladder (A strategy in which an investor divides the amount of money to be invested into equal amounts to certificates of deposit (CDs) with different maturity dates.), with markedly higher interest though!

This means that I’d have the option to keep investing 50€ per project (the minimum), until the year comes full cycle (next July) and then re-evaluate whether I want to increase the sums that I invest or keep them at the same level and lessen contributions. (Since you get interest paid, then for every next 50€ investment you need to add in less of your own money, and just reinvest the returns).

My current plan is to keep to the minimum to slowly diversify my portfolio and then re-evaluate after like half a year. There is always the question of what happens if a project defaults and issues arise or how many projects they’re capable of bringing out to keep cash drag to a minimum. Definitely they seem to have hit the ground running and are doing well enough that I’d dare to give them more importance in my P2P portfolio.

*’If you feel like starting to invest with them, then using the promotion code EGU05422 will cash back 0,5% of your invested amount to both yourself and me as the person who referred you for the first year of investing.

Having invested into Bondora for almost three years now, and having seen many radical changes happen over the course of that time, then yesterday’s announcement about both the primary market and secondary market being phased out to be replaced by either completely passive PMs or a more active chance to build your own API, the question arises – what exactly is Bondora moving towards?

What is alternative finance at heart?

In the recent (I’d say 7+) years information technology has finally reached a level where it’s possible the radically disrupt classical business models via technological solutions. Most know examples of course being AirBnB and Uber, Transferwise, even Google as an overall idea and many others.

Fintech in that sense has been an interesting field to follow since at heart, innovation in the financial industry is mostly limited by how creatively you can find wiggle room between different regulations that try to stifle your growth and business model.

Quite a lot of new innovations have gone with the model of “It’s better to ask for forgiveness than permission”, and Uber is perhaps the best example of this in many ways due to actually being declared illegal in some places due to what amount to essentially cartel agreements that exist in the taxi industry.

For fintech, this has meant that many of the startups have started out being not regulated since they don’t fit into a traditional mould of what a credit institution should be. This is why many fintech start-ups first test their business model with a minimum viable legal work to see if it’s reasonable to pour money into actually working with all the regulations that will start pressing in from all sides once you’re a “real” business.

Bondora is one such example – they started out small enough to not be regulated, and now that they’re big enough certain steps need to be made. The first one was probably being voluntarily regulated by the UK financial inspection, but this was likely only a first step on a long path to the new Bondora business model.

What are the new changes about?

While the information so far has been vague in terms of what will happen (and when), then essentially Bondora will move from a one-time heavily individually (actively) managed investment to a more passive form, closer to a fund than a loan market in terms of how it’s going to work.

Now, where this gets interesting is if you follow what Bondora has been doing recently. Clearly they have done a pretty clear 180 from what they promised several years ago – more transparency and more tools for an investor are nowhere in sight, things that were heavily emphasised a few years ago.

Why the sudden change of heart? Bondora will probably never actually explain anything (since they never do), but it’s likely that this change will pave way for a bigger influx of institutional investors due to how much smoother it will be to use for portfolios that invest significant sums of money. Why institutional investors? – The reason is simple, small scale investors are unable to provide the money for expanding to new markets.

In some ways a more Lending Club-ish method of investing wouldn’t necessarily be bad, I mean it works for LC. Investors don’t really own the loan pieces, LC does, and you essentially buy a “bond” with expected returns. While this will likely drop overall returns, it should in theory also reduce risk. However, the success of their model is still heavily tied to the quality of their clients, so as long as they can guarantee that, then for the investor theoretically there shouldn’t be much difference in how the actual interface works.

Another key thing to keep in mind here, is that Bondora is in the process of getting a banking license. Pärtel mentioned this as well at the Opinion Festival, but it’s a move that makes sense if you want to ease your way into the big players, since the way banks are regulated is in many ways simpler than the (legal) loops that alternative finance needs to jump through. The recent announced changes certainly align with becoming a more “classical” type of business.

*I wanted to write a bit about the api as well, but there isn’t enough information yet. I truly hope they don’t accidentally make a Forex-like system though where you have to pay money to third parties to have the best chance to invest. Especially since most retail investors will never be able to compete with institutional investors.

Today the first equity based crowdfunding site in Estonia launched, and while I fundamentally like the idea of investing into growing companies (more than giving them loans!), then I will probably not be investing through Fundwise for a while still, since I see some key issues in their whole model of working.

Is equity funding smart money?

In the world of investing there exists an idea that some of the money invested is so-called “smart” money. This generally refers to angel investors or venture capital in terms of the investment being linked together with know-how. The problem with Fundwise being, they (either team or the businesses) believe that they are gathering up smart money, but inherently accessible-to-all crowdfunding will never be smart money. Especially in their model where the people who buy a piece are absolutely “silent” owners.

So, there is a fundamental issue here as to the actual plan of how Fundwise should work. Smart money investments are generally bigger in therms of the sum due to the investor knowing more, or being more aware and therefore trusting the project to be a bigger % of their overall portfolio. However, since crowdfunding is fundamentally accessible to all, then you can’t consider it smart money, therefore the large buy-ins for Fundwise start to work against them. (They buy-ins are as high as 600€ per piece).

How to diversify in equity?

This is obviously a trick question – you diversify like in most other crowdfunding investments, reasonably widely. This is where the problem arises with big buy-ins.

Let’s assume that they have 2 projects every month, the buy-ins are an average of the current projects, let’s say 300€. The person might not like all projects, so let’s say the invest into 20 projects per year. The projects last about 5-7 years, meaning that to run 20 investments per year for even 5 years, that makes the total portfolio value 30000€ before the money starts to recirculate. (Yes, I know this is very oversimplified)

This is why Fundwise will likely struggle to include small scale investors such as myself. To achieve meaningful diversification you have to invest so much money, and the delay for returns is so much longer than other similar investments (like social lending or the current real estate projects).

Especially when we talk to people who are just starting and have like a 5000€ portfolio – completely respectable after a couple a years of investing. Just a few investments into Fundwise would very quickly make up 10% of your whole portfolio. I don’t think that’s a reasonable risk level.

What I would invest in

Since it’s currently somewhat unreasonable for me to aim at building a portfolio (since in theory a diversified portfolio would work well enough), then I’d only invest if I saw a project that I’m personally in love with. For example I like the game building project, and that’s something I’d support but in terms of investing it’s a bit closer to a Kickstarter type investment than an actual make-money investment.

Also, I would make a portfolio if the buy-in was sooooo much smaller. I don’t understand why the pieces have to be so big since the people who buy into the project are absolutely silent partners anyway. Also, since you use crowdfunding such as this partially as a marketing tool, then why would more investors be a bad thing?

Expectations vs investor capability

I’d say that the easiest theoretical fix for them would be to realign the idea of who their ideal investor is. If they want so-called smart money they should be heavily marketing towards medium-portfolio investors (100K+), who wouldn’t care about the bigger buy-in and also bring some know-how to the table.

Another option would be to go truly crowdfunding and drop the buy-in like they have in some other crowd-funding portals to like 10-50€, max 100€. That would make it accessible to small scale investors in a way that it isn’t right now. This would also make more people invest – investing 600€ into a project might be above a lot of people’s comfort level, but investing 100€ into something you think is cool, would be a lot more viable.

Also, more work in marketing and communication would definitely help, but that’s the case with all current crowd-related investment portals.

Since Moneyzen is turning one year old, then I took the chance to ask their CEO a bit about how Moneyzen is doing, what kind of plans they have moving ahead and what kind of difficulties they face when trying to build up a P2P lending site.

One year for Moneyzen, what has gone well, what has been problematic?

+ going well

*Good growth rate (we are still operating in 1 country)

*Our business model is working (quality wise, investors return)

*Huge opportunities (even more than a year ago) and … we are smarter

*Change(s) of regulations (much in favour of p2p platforms in Estonia)

*Change(s) of regulations additional development and organisational changes, also additional costs

You mentioned regulations, what kind of work is currently ongoing?

To comply with regulations MoneyZen will bear additional fixed and development costs which are necessary for further operations. The enforced law demants internal audit position (to report Financial Inspection (FI)), business activity insurance, reporting and also licence fee. Latest date the application for licence must be filed to FI is 31.12.2015. So preparations in MoneyZen are in progress to comply with all the requirements.

The purpose of regulations is to correct the market and reduce number of companies providing consumer loans (especially instant loans/sms loans).

The regulation should reduce number of such companies significantly. The regulations are for market correction (good), but we will see most of large instant loan providers continue their activities as well as competition will ease. This means lower competition, which is not always the best solution for innovation and further development.

Beyond filling requirements for regulations, what are your plans for next year?

By same time next year MoneyZen would like to be operational at least in 3 countries (+2 compared to Estonia). For peer to peer lending company it is essential to achieve business volumes to keep business sustainable.

MoneyZen’s goal is to be sustainable and therefore it has to move to new markets. As for business volumes MoneyZen has 2 scenarions for growth. The minimum scenario is growth rate 100% year-to-year basis.

How has your strategy of “prime lenders” worked out for you?

MoneyZen strategy will remain same – personal and the best peer to peer lending platform quality wise. This is the difference we promise and we deliver.

The bottleneck of the strategy is that the number of very good borrowers is much lower than total number of people looking for money. We are going to adjust scoring model in August 2015. In this case (of adjusting) we will be following credit institutions (banks) policy in even more detail than before.

We are also in the process of developing some new products to support our customers starting with loan market.

As for the statistics:

Loans issued during 1 year (14.07.2014-13.07.2015) – 798 100 Euros

Defaulted (legal action) from same period – 17 100 Euros (2,1 %)

Repaid from defaulted (as of 10.08.2015) – 3 300 Euros

These statistics confirm that we are in line with our target quality wise. As for investor set investment return rate then this depends on investors portfolio setup and activity. Monthly blogs have recent investors interest levels disclosed as indication to adjust the interest rate which could participate in the loans.

If investor chooses not to reach then new investors with lower interests are able to invest. In this sense it is fair auction for the lowest interest for borrower. MoneyZen attracts more and more investors every month. Investor investment settings (interest rates) are slowly coming to lower level. We are looking constantly to increase the loan volume to allow more investments for investors. The average interest rate of MoneyZen investors is 21.4%.

This will be supported by loan market feature which will increase the liquidity of investments as they are higher quality investments (compared to market average).

One of (my) complaints has been the speed of web development, what’s happening with that?

Development of MoneyZen business is my personal first priority. There are number of new developments we are preparing and I am certain this will be in benefit of all MoneyZen users. I am also truly thankful to all the investors who have helped us with their comments to improve MoneyZen.

It still is only 1 year of activity so we see quite a number of developments required and I encourage all investors to provide feedback which I can personally take into consideration.

Loan market solution is currently in development stage, earliest prediction is to implement beta version by the end of August or beginning of September (2015). The date of launching the loan market will be provided in MoneyZen blog as soon as we can.

Any non-web related developments happening?

We will have new member of board from August (Jana Loemaa) who has long term experience in lending business. We are also in negotiations to hire another top management professional for further implementation of our growth.

I am stepping down from member of board position (from August 2015) and will concentrate on investors advisory and development of the software. I will continue to invest in MoneyZen as investor and participate in every loan MoneyZen mediates.

Thanks to Daniel for sharing some information about current actions and future plans. P2P investors are always starved for information, so I’m happy to know a bit more about what’s going on!

This week, the Estonian real estate crowd funding site, Crowdestate listed a new terraced houses project, which differs from other projects in many ways. First being that the hope is to run the whole project without a bank loan, giving CE more freedom then usual since you’re not pressured by the bank to sell the project to pay back the loan. Secondly, the predicted returns are lower than other projects so far, and investors are behaving somewhat strangely.

The sum needed for the project is about 500K€, which is a bit more than usual, but nothing that the investors can’t put together. What is strange however, is that the project hasn’t filled up yet when most others filled up in a matter of hours. Looking at the discussions I’ve seen in many forums, then the main reason for that being the opinion that 10-12% predicted net return is “too low”.

Let me repeat that, many people aren’t choosing not to invest not because of risks associated or the fact that they don’t like the project (most people don’t do too much due diligence on the projects anyway), the main reason is that 10% interest earned on a passive real estate investment isn’t high enough to bother.

Expected returns?

Most people are going to have their bubble burst in a painful manner at some point. Due to social lending and crowdfunding becoming more popular and successes of some projects, private investors have ended up with a completely unrealistic expectation of how much money investments should make. To put it into perspective, when it comes to mostly passive investments:

12% return – Very good and optimistic in the long run

5% return – Pretty good, beats inflation

0% return – Yay! You aren’t losing money

Overall, I’d say if the project doesn’t fill up it would create an interesting precedent – people have a lot of money available but they’re not willing to invest it for an expected 10% return. This opens several possible options – 1) people who have money will be able to pick up good stable projects more easily, 2) investors hoping for super good returns will forever be stuck in analysis paralysis and wait for the “best” deal, 3) market will have to rebalance in terms of the scale of projects due to people being unwilling to lock down money, 4) it might turn out that CE has completely missed something in the risk valuation of this project. It will be interesting either way!